Policy Reform, Shadow Prices, and Market Prices

56 Pages Posted: 15 Feb 2006

See all articles by Jean Drèze

Jean Drèze

University of Delhi - Delhi School of Economics

Nicholas Stern

Stern Review on the Economics of Climate Change

Date Written: October 18, 1988

Abstract

How should possible policy reforms and projects be assessed when prices give misleading signals? Revenues and costs at market prices then give distorted measures of social gains and losses and our appraisal should use social opportunity costs, or correctly defined, shadow prices. We show how shadow prices may be integrated into an analysis of tax and price reform, demonstrate the critical dependence of these prices on government policy, and analyze their relations with market prices. A conceptual framework for applied analysis is provided plus a detailed theoretical account of policy in a model with some fixed prices, rationing, and taxation.

JEL Classification: 0200, 0242, 0243, 0270, 1130, 3200, 6140

Suggested Citation

Drèze, Jean and Stern, Nicholas, Policy Reform, Shadow Prices, and Market Prices (October 18, 1988). IMF Working Paper, Vol. , pp. 1-56, 1988. Available at SSRN: https://ssrn.com/abstract=885049

Jean Drèze (Contact Author)

University of Delhi - Delhi School of Economics ( email )

G.T. Road,
Shahdara
Delhi-110007, Delhi 110032
India

Nicholas Stern

Stern Review on the Economics of Climate Change

HM Treasury
1 Horse Guards Road
London SW1A 2HQ
United Kingdom

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